Saudi’s age related spending 'set to escalate'

Madrid, March 26, 2013

Saudi Arabia’s age related spending is much less than for advanced economies and even other emerging economies.

Nevertheless, age related spending is expected to rise significantly, from 4.9 per cent in 2010 to 13.5 per cent in 2050, according to a Standard & Poor’s report titled Global Aging 2013: Rising to the Challenge, which addresses the impacts of aging on public finances.

Saudi Arabia’s old age dependency ratio (the number of over 65s relative to the population aged 15-64) will more than quadruple by 2050, the report forecasted.

For Saudi Arabia, pensions remain the biggest spending item, followed by health care. Pensions will rise to slightly more than 8 per cent of GDP by 2050, whereas health care will increase to 5.4 per cent of GDP.

The S&P study revealed that there was a broad trend of emerging economies increasing their healthcare spending faster than their spending on pensions.

However, for Saudi Arabia, health care spending will increase by 2.7 per cent of GDP, compared with the increase of 5.9 per cent of GDP which will be spent on pensions.

By 2050, the Saudi Arabia sovereign would hypothetically retain its investment-grade rating, although it would be lower than its current AA- rating at A, according to the report.

“Once the current, post-crisis economic and budgetary difficulties are overcome, if efforts to adapt social security systems to the demographic challenges are sustained, the pressures of population aging on public finances could be gradually contained over the long term – a somewhat surprising conclusion during the current stages of sovereign debt crisis,” said Marko Mrsnik, sovereign analyst at Standard & Poor’s Ratings Services and author of the report.

Several nations have begun to implement health care and pension changes to plan for rapidly aging populations while responding to near-term budgetary pressures, although the impact of these measures is being offset by ongoing economic weakness and diminished employment levels in some countries.

Coupled with higher borrowing costs, such trends are hampering efforts to stabilize debt dynamics. But if kept in place, S&P believes that the structural changes and budget consolidation many sovereigns have put in place in recent years should improve their prospects for maintaining sustainable public finances.

“This may be just the start of a decades-long period of rising tension between two seemingly conflicting priorities: the need to sustain public spending on pensions and health care for aging populations versus the need to hold down or reduce government budget deficits and debt,” added Mrsnik.

Although often viewed by public opinion as an issue primarily faced by advanced economies, S&P’s analysis suggests that the need to alter demographically-driven budget trajectories is almost as pressing for some emerging market sovereigns as it is for sovereigns with advanced economies. – TradeArabia News Service